February 17, 2009

Housing : A bunch of damn idiots

Here's an infuriating little article over at Business Week talking about mortgage mod's (the few that have been done) and the poor homeowners.

Let me just say, my sympathy is wearing a little goddamn thin. For everyone from the stupid homebuyers, to the retarded reporters trying to get a handle on this, to the corrupt politicos all the way up to the morons at far loftier levels than the one I occupy in the banking industry who were too stupid to realize that they'd built their houses on foundations of sand.

First off, giving BK courts cramdown authority IS going to have a negative impact on the pricing of loans in the US. Pure and simple. Think about it this way... I'm an investor in US denominated debt securities, usually MBS. Suddenly, some of the mortgages that make up the securities I've paid 102 for are being reduced by judicial fiat to 60, which drops the overall value of my securities to 90. Do you REALLY think I'm going to buy more of this crap that just gets arbitrarily written down? Hell no... I'll go invest in fixed income securities in the EU or Asia where the rule of law and the sanctity of contract still means something. Which means MY money is no longer helping to prop up the US economy. And suddenly, there's a flood of dollars, inflation goes through the roof and interest rates start going up and up. But McBlogger, we can just borrow the money from banks? Sure. At far higher interest rates. What no one out there really gets is that securitization save consumers money by making loans cheaper. Fuck that up and we're back to 20% down, 60 days to close and high interest rates.

The most irritating thing about cramdowns is that they aren't needed though lots of stupid people will tell you differently. Take the folks from the BW article...

vConsider the case of Ocbaselassie Kelete, a 41-year-old immigrant from Eritrea who called Hope Now last fall. Kelete, a naturalized U.S. citizen, bought a $540,000 townhouse in Hayward, Calif., in November 2006 with no down payment and 100% financing from First Franklin Financial, a subprime unit of Merrill Lynch. At the time, he and his wife earned $108,000 a year from his two jobs, with a pharmacy and an office-cleaning service, and hers as a janitor. Kelete says First Franklin and his realtor convinced him that he could afford a pair of mortgages, one with a 7.5% initial rate that would rise after three years, and a second with a fixed 12% rate. His monthly payment would total $3,600.

Now we don't know what he's currently making... however, based off his old total income, 40% of his gross earnings were going into the damn house. 40%! Now, I've seen people spend like that and be fine... so, why not this guy? This asshole's goddamn mortgage hasn't even reset and he's whining? AND I'M SUPPOSED TO FEEL BAD FOR HIM??!?!?!!? No, ma'am. What this guy needs is a lesson in managing his finances. Fortunately for him and the millions like him, we don't have that kind of time. So, what to do?

Easy... refinance him using FHA. Limit to no more than $1mn per loan nationally, no appraisal and you can't exceed more than 106% of the original loan balance which will allow them to put in costs, arreage and past due taxes. Pass a law that breaks the prepayment penalty on the loans but allows the servicer to charge the loss against future earnings (since they'll be on the hook for it to the end investor). The loan pays off at par, the investor takes a minor hit, the servicer takes a hit and the homeowner gets a mortgage they can afford but at the full amount they agreed to pay. The government, for it's part, insures the loan against default, takes a nice premium for doing it and the market stabilizes because the new securities have a government backing.

With this in place, you will rapidly see bank balance sheets restored because the securities they are holding will be steadily bought out under the new program when the existing loans are refinanced. Honestly, this is the easiest way to do it and most effective because it helps everyone. The best part is that the government can effectively borrow money at 3%, then loan it back out at 5%. You could use the differential to strengthen entitlements and give a huge boost to upgrading infrastructure. The only problem is that the Centrists in Congress would never let it pass because they are too stupid to understand the complexities of the situation we're in.

Second, on the issue of modification, go read this. More specifically, the section on modifying the mortgages that make up the securities. Needless to say, it's pretty much impossible.

There is another option... the government could buy up the MBS, break it apart and mod the underlying loans or mitigate the losses on the homes that are foreclosed. That would end up leaving tax payers on the hook for around $3 trillion. This is probably what will end up happening if the government proceeds with the public-private plan, or worse, nationalization. PPP requires the government have partners with money. There are plenty of vultures out there right now, but few are willing to pay what the banks think the paper is worth. Pimco has been willing to buy MBS at 60 cents on the dollar, but that would mean the banks lose the upside... and it would neatly put a giant hole in their balance sheets. Best case, the government could make an equity investment in the banks, restoring balance sheets and wiping out the existing shareholders. Then they have to clean up management and reprivatize the banks. All this will do is make a lot of already rich people very rich. It may sound good, but in the end this doesn't do a damn thing to fix the loans.

They've got to be modified via refinance. Congress has to free HUD to do it. The only way that will happen is if the President and the Democrats brow beat the Republicans. Of course, they also have to realize it's the right thing to do.

Finally, the idea this is going to go away or that we can end this crisis without dealing with the underlying problems is ridiculous. Putting people into emergency loans is one thing but we have to fix regulatory enforcement. Then we have to fix the accounting regs that forced mark to market accounting when the market was broken. I wrote about this more than a year ago. I also wrote this. Go read it then come back and reread the section on this public-private bullshit.

While it's viscerally satisfying to nationalize and wipe the banks clean, it also leaves tax payers on the hook.

Oh and let's actually fix this and THEN move on to Social Security, Mr. President.

Posted by mcblogger at February 17, 2009 12:09 AM

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